Solving the Persistent Problem of Shrink

In 2007, US retailers experienced approximately $40 billion in shrink. For an industry where company margins typically hover between 1% and 2%, shrink remains a critical opportunity to enhance company performance and improve the bottom line. While most retailers have tried a variety of tactics to reduce shrinks monthly toll on profitability, for many it remains a frustrating game of trial and error: some efforts reduce shrink at the cost of losing margin; other techniques compromise sales. After failing to tackle the problem, many managers conclude - wrongly - that high shrink is simply a cost of doing business.

Six Sigma is a statistical approach to improve business performance that started at Motorola back in the early 1990s. Since then, the approach was adopted by many leading manufacturing companies, such as GE, Allied Signal and DuPont, helping them save billions of dollars in costs. Over the last number of years, Six Sigma has been adopted and utilized in a verity of other industries, including Financial Services, Energy and Utilities, Life Sciences, and Government.

The fundamental problem with shrink management is that retailers continue to try to use the same old approaches to solve it. Some common mistakes retailers make in their shrink reduction efforts are,

1. Lack of a fact-based, data-driven approach

2. Not identifying the real problem

3. Taking an undisciplined approach to solving the issue

4. Creating an unsustainable approach that fails to maintain a culture of shrink reduction.

Shrink can be significantly reduced by understanding these critical issues and following the steps outlined below.

Solving the Shrink Problem

1. Get the Facts

Most retailers say that shrink is one of the biggest problems in business and it becomes clear that many organizations simply do not have either the data or the measurement systems to assess the scope of the problem.

Retail shrink is measured by calculating the difference between the amount of goods a company should have on hand and its actual inventory (commonly determined through cycle counting). Oftentimes, however, the data companies collect for this purpose does not provide the detail retailers need to tackle their shrink problem. A good example of this is when a company accepts shipments of product from vendors, but does not validate the exact quantity of each of the items received. This causes retailers to have incorrect data in inventory systems, disrupting their ability to conduct accurate shrink analysis.

It is critical for retailers to make the investment in systems and processes to capture the true value of shrink. Accurate data can help drive your success; inaccurate data can throw your business off track.

2. Take a Disciplined Approach

A common mistake retailers make is attacking shrink as a single large problem. To successfully combat shrink, retailers need to break down the problem into manageable levels by doing the following:

­ Identify the biggest opportunities A truly thorough assessment of shrink begins by assessing the actual dollar value of reducing shrink, rather than just a percentage improve-ment. This assessment should include looking at shrink metrics in a variety of ways, such as by item, category, department, district, area and region. This allows retailers to look at the problem more analytically and determine their biggest areas of opportunity, helping them avoid expend¬ing effort in "pain-point" projects that may be highly visible to some people, but deliver little ultimate gain.

­ Dedicate resources To attack a problem as stubborn as shrink, retailers need to assign a focused team to solve the problem and then hold the team members accountable for savings. Reducing shrink cannot be accomplished with a general directive to employees. Instead, it requires a concerted focus of professionals and team leaders who can build experience in solving shrink problems over time.

­ Track progress "Once a retailer knows where to focus and who will do the work, progress must be tracked and managed," says Niles. Managers should know the status and expected completion date for every project in your shrink initiative. "In the best managed companies today, shrink is a clear management Key Performance Indicator and projects that improve shrink are tracked regularly."

3. Make the Success Last

Once a company finds the root causes of shrink and applies the right solutions, the remaining challenge is making the improvements "stick" over time. This results in a situation where companies may have to solve the same problem year after year. To avoid this, managers should establish clear responsibility and accountability for improvements and conduct periodic reviews to ensure new processes remain intact. In addition, they must react quickly if processes do not perform as expected. Finally, shrink reduction objectives should be included in performance goals whenever possible to hold associates and managers accountable for sustaining the improvements.

Shrink is one of the most nagging challenges for retailers today. The good news is shrink can be solved, if executives attack it in the right way. When approached correctly, companies can achieve breakthrough levels of improvement and experience lasting change that will provide tangible economic benefits for years to come.

Suzanne Long is a senior consultant for leading Six Sigma Company. SSA & Company provides business process consulting and Lean Six Sigma expertise to an extraordinary group of clients across a broad range of industries. It adapts new methods to work in all vertical markets and across all types of companies, big or small.